If you are thinking about dabbling in crypto, feeling overwhelmed is understandable. The terminology can be dense and confusing for newcomers, and it can be tricky to understand what everything means.
People know that crypto is something related to an alternative, digital currency that’s decentralized, but everything after that gets confusing. If the cryptocurrency world hopes to reach a wider audience, it’s imperative that the concepts become a little more approachable to the common man.
In this article, let us learn what an “RWA” is and why it represents an important concept in the crypto world.
What Are Some Examples of RWAs and What Is Their Significance in Crypto?
RWA stands for real-world asset, and if the expansion of the word seems to make sense, keep reading, because there are multiple angles at play. Yes, as you might have guessed, RWAs represent a physical asset or a ‘tangible’ asset.
We will be exploring what the different types of RWAs are later on, but first, we need to know why their role exists in the first place. RWAs essentially exist as a bridge between traditional and digital finance. This makes it possible for real-world assets to be represented in the blockchain world.
What’s more, when you tokenize a real-world asset, it means that the asset can be divided into several, smaller, tradable units. This is a big deal because investors can buy fractional shares of the asset rather than buying the entire asset as you would traditionally do.
As Polymesh points out, this results in great market liquidity along with a sort of democratization of investments. These opportunities would otherwise be accessible only to institutional investors. There are several other beneficial reasons for RWAs to exist, but let’s look at some common RWA examples now.
What Are the Different Types of RWAs?
There are several popular examples of RWAs. Real estate, art, intellectual property, and physical commodities are all examples of RWAs. Essentially, anything outside the blockchain can become an RWA. It’s as simple as that.
The real beauty of this concept is when tokenization occurs. For an asset to be tokenized, the token needs to be backed by something. This backing needs to be worth the same as the asset itself. Moreover, the legal rules that apply to your RWA also apply to the token.
So if your RWA is a painting, then when you sell the token of said RWA, you would have to sell the painting. The backing of tokens can be a little confusing. There’s a whole lot of information you can find online, and we recommend you do some reading on the following themes:
- Off-chain collateral that is directly backed by a centralized exchange
- Off-chain collateral that is indirectly backed by a centralized exchange
- On-chain collateral that is indirectly backed via price feed exchange
Each of these backing types has its own pros and cons that you will need to investigate on your own. Most people prefer stablecoins such as USDC, USDT, or DAI. Data shows that 95% of the market is made of these three USD stablecoins. These assets are backed by the U.S. dollar and are quite popular today.
Does the Type of RWA You Own Matter?
Indeed, it does, but not for the reasons you might imagine. For one, tokenizing an asset brings with it a number of legal considerations. Say you want to tokenize a piece of real estate. There will be regulatory oversight in the form of zoning regulations or real estate transfer fees. Meanwhile, financial instruments like bonds would be subjected to securities regulations. Some RWAs, like tokenized Treasury products, have seen massive growth recently, witnessing a 782% rise in 2023.
The type of RWA you invest in also matters based on the risk variation of the asset type. Likewise, even tokenized RWAs are subject to market dynamics based on demand and interest. For instance, some RWAs, like real estate, seem to be more in demand than others.
They attract investors who are looking for long-term investments that are stable. On the flipside, tokenized commodities also have demand, but mainly from those looking for hedging opportunities.
All in all, RWAs are something transformative in the crypto world. The ability to tokenize assets unlocks new investment opportunities for people who would never have a chance otherwise. RWAs enable a level of market liquidity that often surpasses real-world markets due to the power of fractional ownership, 24/7 trading, and global market access.
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